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Indian stock market and companies daily report (September 03, 2012, Monday)

Contributed by Angel Broking

Indian markets are expected to open in the green, following a positive opening of the SGX Nifty and expected deferment of GAAR for three years.

The US markets ended higher on Friday, after reacting positively to a closely watched speech by Federal Reserve Chairman Ben Bernanke. Bernanke reiterated that the central bank will act "as needed" to boost the sluggish economy, although he did not explicitly signal any further stimulus efforts. Traders shrugged off some mixed economic results from the US in the afternoon wherein though factory orders came in better than expected and the consumer sentiment result was upwardly revised, the Chicago business barometer slowed by more than economists had been anticipating.

Indian shares fell sharply on Friday after government data showed the country's GDP growth languished around its lowest level in three years in the first quarter ended June. GDP grew at a higher-than-expected 5.5% versus forecasts for a 5.3% expansion, dashing rate cut hopes left over, if any, at the upcoming monetary policy meeting to be held in September.

Markets Today

The trend deciding level for the day is 17,425 / 5,267 levels. If Nifty trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,513 - 17,645 / 5,295 - 5,331 levels. However, if Nifty trades below 17,425 / 5,267 levels for the first half-an-hour of trade then it may correct up to 17,293 - 17,205 / 5,231 - 5,203 levels.

GAAR expected to be deferred for three years

General Anti-Avoidance Rules (GAAR) which was introduced by then finance minister Pranab Mukherjee in his budget speech in March 2012 is expected to be deferred for three years till April 2016. By delaying GAAR, the government will substantially reduce the uncertainty among investors, and reduce the overhang that has been there since its announcement. We believe this move will act as a catalyst for the revival of Indian equities if followed up by other actions such as FDI liberalisation, aligning of diesel prices to the market and other pro-growth measures.

GDP growth at 5.5% for 1QFY2013

Real GDP growth for 1QFY2013 increased to 5.5%, marginally higher than 5.3% growth in the previous quarter. GDP growth for 1QFY2013 is largely driven by growth in construction and financing, insurance, real estate & business services sector. Construction reported growth of 10.9% as against 4.8% growth in 4QFY2012 owing to high growth in production of cement and consumption of finished steel. Financing, insurance, real estate & business services maintained their growth momentum by reporting 10.8% growth as compared to 10% growth in the previous quarter.

Service sector growth, with the highest weightage in GDP, declined for the third consecutive quarter to 6.9%. The industrial sector reported growth of 3.6% supported by growth in construction and electricity. Mining, manufacturing and electricity, gas and water supply reported growth of 0.1%, 0.2% and 6.3% respectively in spite of de-growth in the Index of Industrial Production (IIP) for mining and manufacturing by 1.1% and 0.7% during the period. Agriculture, forestry and fishing reported growth of 2.9% in 1QFY2013 as against growth rate of 1.7% during the previous quarter owing to positive growth in wheat, cotton, sugarcane and cereals although production of rice and oilseeds marked a significant decline.

In spite of growth coming in at higher-than-expected level, the economy has witnessed significant slowdown in its growth trajectory. We believe that the RBI is unlikely to cut its key policy rates in the Mid Quarter Review of Monetary Policy due in September since upside risks to inflation continue to persist in the near-term.

Automotive monthly sales - August 2012

Maruti Suzuki (MSIL)

MSIL recorded 40.8% yoy (34.1% mom) decline in total volumes to 54,154 units on account of month-long lockout at its Manesar plant due to violence. The Manesar shutdown negatively impacted sales of popular models, Swift and Dzire which continues to witness strong demand. Hampered by the production constraints, sales of Dzire were down by 60.7% yoy (73% mom) during the month. Sales of passenger compact cars which includes Swift, Estilo and Ritz, together clocked a decline of 62.2% yoy (61.6% mom) mainly due to the strike at the Manesar plant. Exports during the month stood at 4,025 units, down 72% yoy (64.1% mom).

Mahindra and Mahindra (MM)

MM continues to defy the current trend of slowdown in the automotive segment and posted a healthy growth of 10% yoy (down 7.1% mom) to 59,070 units led by strong growth of 21.6% yoy (dowm 2.6% mom) in the automotive segment. The automotive segment growth was led by 39.4% yoy (5.2% mom) growth in the passenger vehicle segment (includes UV and Verito) which was driven by XUV5OO and refreshed version of Verito. The four-wheeler pick-up segment too posted a strong growth of 13.6% yoy (down 2.9% mom). The tractor segment however, registered extremely weak sales with total volumes declining by 17.3% yoy (19.9% mom) to 13,234.

Tata Motors (TTMT)

TTMT registered healthy sales for August 2012 led by strong growth in the domestic passenger vehicle sales which grew by 33% yoy (down 15% mom). Total volumes increased 12% yoy (down 2.3% mom) to 71,826 units. Passenger vehicle sales growth was led by significant run-up in Nano volumes which grew by 441% yoy (18.6% mom) to 6,507 units. The Indica and the UV range too registered a strong growth during the month. Commercial vehicle segment, however, recorded a modest growth of 5% yoy (strong growth of 6.5% mom) as MHCV volumes declined 12% yoy (up by a strong 14.8% mom) due to slowdown in industrial activity and lower freight availability. LCV sales continued with strong momentum registering a growth of 16% yoy (2.9% mom).

Hero MotoCorp (HMCL)

HMCL reported a dip of 11.9% yoy (8.3% mom) in its total volumes to 443,801 units led by demand moderation in the domestic markets due to the overall macro-economic situation which has adversely affected retail sales, both in the urban and the rural markets.

TVS Motor (TVSL)

TVSL posted poor numbers yet again with total sales declining by 20.7% yoy (4.1% mom) to 154,647 units led by continued weak performance across all the product segments amidst demand moderation and rising competition. While motorcycle sales declined 30.9% yoy (flat mom), scooters sales plunged sharply by 26.9% yoy (6.6% mom). Three-wheeler sales witnessed a decline of 17.1% yoy (up 18.5% mom) to 3,907 units. Exports declined by 17.1% yoy during the month

CAG report on coal blocks

The Comptroller and Auditor General of India (CAG) in its report "Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production (Ministry of Coal)" has estimated a gain of '185,591cr to private companies for open cast mines due to policy defaults by the Coal Ministry/ government. It states that there was no transparency in allocation of blocks and auctioning/competitive bidding for the mines would have tapped a part of this financial benefit.

A total of 154 coal blocks were awarded to public and private companies (including UMPP's) after July 2004. However, CAG's loss estimate of '185,591cr is limited to allocation of 57 mines allotted to private companies. CAG has benchmarked the selling price, average production cost and net finance gain to Coal India's financials. Thus, it estimates a net gain of '295/tonne on the estimated recoverable reserves of 6,282mn tonne, amounting to '185,591cr.

Our take: While the policy of allocating mines is a debatable issue, we believe that the gain of '185,591cr to private players has been mis-calculated. Firstly, the net gain of '295/tonne cannot be a benchmark for all the 57 mines as the cost of production, grade of coal, capex incurred, annual production capacity etc vary significantly for different mines. Secondly, CAG has not considered the present value of the financial gain.

The road ahead: The government had indicated its intention to auction the upcoming mines well before CAG's report was out. Hence, we believe that there would be auctioning/competitive bidding for the mines that would be allotted henceforth. However, a comprehensive policy on auctioning coal block will take its own time in our view; meanwhile, we would see no coal blocks allotted to any private companies in the near-term. Further, for the existing 57 blocks, there are several possibilities including a big one-time payment (based on present value of coal benefit), higher royalty, profit sharing or even de-allocation of the mines.

Among the private companies named in the report who benefitted from these 57 blocks, our coverage companies include Tata Steel, JSW Steel, Hindalco, Electrosteel castings, Monnet Ispat, Bhushan Steel and Sterlite Industries. Most of these companies' stocks have declined since the announcement of the CAG report. We believe that the share price performance of these stocks will remain muted in the near-term due to uncertainty over the future of allotted coal blocks to these companies.

JSW Steel and JSW Ispat to merge

The deal: JSW Steel has announced that it will merge JSW Ispat which will result in potential tax benefits to the merged entity, although it will increase the leverage levels of the merged entity. JSW Ispat's shareholders will receive 1 share of JSW Steel for every 72 shares held resulting in equity dilution of 8%. Shares of JSW Ispat held by JSW Steel will be cancelled. Further, JSW Steel will also issue 48.54cr new 0.01 per cent non-convertible cumulative redeemable preference shares to the preference shareholders of JSW Ispat. JSW Steel had acquired 47% stake in JSW Ispat during FY2011 for '2,157cr. Thus, JSW Steel will issue 1.86cr new equity shares resulting in increase in outstanding shares to 24.2cr. The merged entity's steel-making capacity will increase to 14.3mn tonnes from the current 11 mn tonnes capacity of JSW Steel (standalone). Post-merger, the JSW Steel's promoter's stake will decrease to 35.12% in the merged entity, compared to current stake in JSW Steel of 38.02%.

Implications of the deal: JSW Ispat, being a loss-making company, has a tax benefit of '288cr which will now benefit the merged company. The merger is also expected to lower the interest cost of JSW Ispat as being a loss-making entity JSW Ispat's debt's interest rate is higher. However, the net debt (including acceptances) of the merged entity will increase to '32,700cr from the current JSW Steel's debt of '24,100cr. JSW Steel's standalone tax rate of 30% is likely to fall to 20%, thus boosting the EPS during FY2014 in our view. The deal is subject to several approvals and is expected to be completed by end of FY2013. Going forward, we will revise our estimates to factor in the financials of the merged entity. Until then, we maintain our Neutral rating on JSW Steel.

Economic and Political News

- RBI permits qualified foreign investors to hedge foreign currency risk

- Coal Ministry told to decide soon on 58 blocks

- Power Ministry ignored PMO on award of six hydro projects

Corporate News

- Odisha shuts 6 Coal India mines as eco clearance expires

- Reliance Infra to commence cement production by month-end

- Major fire breaks out at Apollo Tyres Kochi unit